Why Values Trump Prescriptive Approaches for Your Money
Along with the usual notes of enthusiasm that accompany the ticking over of a calendar year, come prescriptive lists in the blogosphere on how to improve your finances and achieve your goals. The “finlit” space is full of recommendations on the percentages that people should be investing, saving, and spending. It all sounds good, until you try putting it into practice. After spending a decade working with families to help them fix financial challenges, I realized that prescriptive approaches work very well for some individuals, but not so much when applied more broadly.
Cast your mind back to the publication of The Wealthy Barber by David Chilton, a beloved Canadian classic on financial planning. Roy, the wise barber, offers the following advice: “Wealth beyond your wildest dreams is possible if you learn the golden secret: Invest ten percent of all you make for long-term growth. If you follow that one simple guideline, someday you’ll be a very rich man.” Is that true? Will a ten percent savings and investing rate generate wealth? Perhaps, if you earn enough, start early enough, and don’t have corrosive debt (i.e. debt that erodes your wealth, such as credit card debt.) If my teenage daughter were to invest one tenth of her income starting in her eighteenth year while avoiding credit card debt, Roy’s advice would probably work wonders. She’d be wealthy by the time she hit middle age, assuming she invests wisely.
What about a woman who finds herself divorced in her late thirties, with two children? Will ten percent be enough? Or the middle-aged couple who have earned, and spent, six figures for years? Will they retire comfortably with that level of savings? From my work with clients in this position, I’d bet that they’d burn through their cash in no time with only ten percent set aside on an annual basis, especially if they’re carrying debt. We’d need to understand more about their current lifestyle and retirement targets, as well as their spending patterns, to know whether a ten percent savings rate is necessary or sufficient.
There are challenges on the spending side of the equation as well. Lenders max out our total debt service ratios at forty-two percent (with a few exceptions.) I’ve seen some families borrow right up to the limit and thrive, while others struggle under the weight of household obligations. Same numbers, different outcomes, depending on the families’ situations. Just because a bank tells you a given ratio of income to expenses meets their requirements doesn’t mean it makes sense for you.
There are no magic numbers. Trying to figure out the best target percentages for everyone is putting the cart before the horse. Your goals shouldn’t be massaged to fit into a mould; the percentage targets should suit your desired outcomes.
Ideal savings and spending amounts depend on what you want to accomplish with your money, how much you have coming in, and what you owe. If you wish to live simply in retirement, your current savings targets will be lower than those for someone who wants to travel the world, take up expensive hobbies, and live large. A standard approach won’t help someone who saves like a prince but lives like a king.
When I first started working with families as a financial repair specialist, I used prescriptive targets until I realized that I was trying to fit square pegs into round holes. The results were mixed at best. Everything changed when I evolved toward a values-based approach to planning. Here’s a quick overview of how the latter works.
Clarify what you value
What matters most to you: Achieving financial independence? Ensuring your family’s health? Ongoing education? Philanthropy? Travel and adventure? Spending time outside? Engaging in meaningful work? Quality time with your kids? Use the latter as a starting point to identify your top non-negotiable values. You can Google lists of values to help you out. As you read various lists, you might argue that they all matter to you. Of course, you want to live a life of integrity, spend time with your family, ensure everyone is healthy and so on. But when it boils down to it, we all have top priorities. That’s what you’re after.
When you have your own list, use it to serve as your guide post in determining how to apportion your money. Instead of trying to fit your financial life around an arbitrary number, this approach treats money as an important tool to serve your unique purposes. When you start by asking, “What do I want money to do for me?” you treat it as your employee; not the other way around.
When I did this exercise with one of my clients, Jane*, she immediately responded that achieving financial peace of mind is one of her top values. For her, that means never having to worry about paying the bills, knowing that she can provide good educational options for her children, and being able to afford quality time with her family. As a single mother, financial security is top of mind.
Create values-based goals
Now that you’ve clarified what matters most to you, it’s time to create goals that are congruent with your values. If, like Jane, you listed financial peace of mind as a top value, what would help you achieve that state? You might list something like the following:
1. Organize my financial records so that I know exactly where I stand.
2. Automate bill payments to ensure they get paid on time.
3. Max out my Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) investment room this year.
You’re looking for specific tasks that will move you forward towards what you value most. When Jane and I looked closely at her current spending patterns, she realized that her perpetual credit card balances were harming her ability to develop a stress-free financial system. I showed her the math behind credit card debt and she understood that financial freedom was not possible until she eliminated that debt for good. Instead of prescribing a reduction in expenditures of X%, we instead asked, “What would it take to eliminate all credit card debt and grow savings?” Jane tracked her spending carefully for a couple of months and aggressively eliminated everything that wasn’t in line with her values. By using a values-driven approach, she is on track to eliminate all credit card debt within one year, which is much faster than she initially thought possible. If, however, I had said, “OK, Jane, you need to cut back on spending by 35%,” she might have balked. She decided what she wants her money to do for her, which makes the process sustainable.
There is a movement called Financial Independence, Retire Early (FIRE) which consists of people saving seemingly impossible amounts of money in the pursuit of financial freedom. Why does it work for them? Because they are motivated by goals tied to their values.
If someone told you to save fifty percent of your income, as some members of the FIRE movement do, you might declare them to be mad. On the other hand, if you decided that achieving financial independence in the next ten years is something you value highly, you might embrace the challenge and be willing to work through the difficulties.
Apportion your money according to your values
Once you’ve determined your goals, direct your money in order of importance. What’s your top priority? For most people, the list looks something like this:
1. Take care of your core needs – housing, good food, medical care, education, transportation.
2. Tackle corrosive debt.
3. Save and grow money to fund your goals.
4. Spend on everything else.
When Jane began to spend her money consciously in pursuit of her values, her results changed substantively. She stopped spending on items of little value and focused instead on getting a bigger bang out of every dollar. When she’s not sure about an expenditure, she asks one simple question: “Is this congruent with my values?” This simple question has helped her free up a great deal of money. She must still make hard choices, but by seeing her regular progression toward her goals, she is motivated to persist.
To make the most of your money, you don’t need a prescription; you just need to know what you value and go from there. Is it always easy? No, but it’s effective and the results are worth it.
*not her real name
Doris Belland is a financial literacy educator, host of the Women’s Money Group, founder of Your Financial Launchpad, speaker and author of Protect Your Purse, Shared Lessons for Women: Avoid Financial Messes, Stop Emotional Bankruptcies and Take Charge of Your Money. For more information about her work, please visit www.YourFinancialLaunchpad.com.